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One of the questions I get most from clients is how to generate yield when the Fed is on hold with rates at zero. For a while many defensive clients were content receiving their 3% annual yield from Treasury bonds, but the Fed’s most recent meeting minutes shows that the Fed’s pace of bond buying may soon slow. While I do not think tapering is likely before year end (unless economic data accelerates significantly) the bond market is forward looking and already beginning to price tapering in.Smaller Fed purchases of Treasury bonds will mean that bond yields go up and bond prices go down. Bonds have been in a multi-year bull market, and we may now be on the cusp of a multi-year bear market.The most important indicator to watch is the 10-year yield, which cracked the 2.10% level this week for the first time in a year. If we continue to hold above 2.05% in June, the top is likely in for bonds and borrowing rates will be on the rise for everyone, including the US Treasury. So, how am I pla…

This morning almost 9000 Microsoft June 36 call options were purchased within minutes of each other around 9:30am for about $0.27. Currently, Microsoft is trading at about $35 but opened for the day at $34.85. This transaction is a bullish bet that Microsoft stock will rise above the breakeven point of $36.27 by the 21st of June, equivalent to an increase of about 4.1%

This trade occurred on the tail of MSFT releasing its new all-in-one consul Xbox One. MSFT already had a thick slice of the consul market, and this new product offers more options than its competitors with capabilities of TV, sharing, and music capabilities, in addition to gaming. The reception of the new Xbox was not particularly astounding to stockholders, indicated by the drop in stock price, but this drop was quickly restored to previous prices. Another reason why holding Microsoft might be a good move is because Microsoft will release their fourth quarter dividend dates in mid June, probably prior to the expiration…

Today US markets are following Europe’s sell off, and being led down by traditionally safe, defensive sectors like the utilities and healthcare. Johnson & Johnson is one of those names being sold, and is seeing bearish option activity. The biggest trade this morning was the sale of 3,179 July 90 calls for $0.55. This is neutral to bearish trade that expects the stock to be below 90.55 at July expiration.

There are a few reasons to bet that JNJ, which is up 21% year to date when then S&P 500 is only up 13%, is due for a breather. The stock has slightly outperformed the Healthcare Sector this year, benefiting from a flight to safe, defensive, dividend paying names. However, the stock’s PE of 23.75 is near levels not seen since 2005 and suggests that the stock’s price has gotten a bit ahead of its earnings. JNJ’s CFO Dominic Caruso has even hinted that he would not expect the stock to continue to rally at the same pace it has the past few months. One point of concern is a decline…

This morning Shares of Ford are jumping higher on news that the Case-Shiller housing index rose to its highest level in seven years, and that consumer confidence jumped to its highest level since 2008 and a 10.9% gain. One option trader bought 3500 15.50 weekly calls for $0.08 this morning into the stocks strength, betting that Ford could rally 2.3% by the close this Friday. Strong housing numbers are good for Ford because it indicates strong demand for Ford’s trucks. Additionally, sales of trucks are expected to be strong because gasoline prices are expected to be relatively flat through the rest of 2013.

Besides the positive US housing market, other reasons exist to invest in Ford. Some analysts have predicted that the European economy has reached its low point and will soon be showing some growth within the near future. This would increase European consumption and as a result increase demand for automobiles in the continent, of which Ford had about an 8% market share of April 2013.…

Today one stock seeing heavy option volume is Phillips 66. The biggest trade of the day was the purchase of 5,000 November 80 calls for $1.95 with the stock at 66.33. This is a bullish bet that the stock will be above 81.95 at November expiration, a 24% move higher. This bullishness comes on the heels of a recent announcement by the company that they will boost shipments of cheap domestic crudes to its refineries across the country by as much as 130,000 barrels per day. To accomplish this PSX has joined forces with Enbridge Energy Partners for rail shipments of Bakken crude to its east and west coast refineries. Shipments are expected to reach 35,000-40,000 barrels per day by the fourth quarter.

Recently the refiners have sold off as the spread between WTI crude and Brent narrowed along with the crack spread. However, as more capacity to transport and product US crude comes on line, the WTI – Brent spread should widen back out, which gives refiners like PSX a leg up on the global comp…

Today marks the one year anniversary of FaceBook’s IPO. After a year of trading the stock is down 37%, and today one option trader is betting that the stock could trade even lower. One of the biggest FB trades today was the purchase of 8353 July 25 puts and the sale of an equal number of July 22 puts. This creates a vertical spread for a net debit of $0.55. This will profit if FB is below 21.45 at July expiration, 19% lower.

This trade could be a either a trader speculating that FB will move lower, or a long term investor that wants a cost effective hedge against a dip in the shares. The benefit of put verticals like these is the risk/reward ratio that they offer: this trade risk only $0.55 but has the potential to return up to $2.45 in profits, for a 445% return on investment. Therefore it allows FaceBook bears to gain exposure to the stocks downside without taking too much risk if they are wrong. Similarly, for someone who is long FB shares it offers the ability to hedge their losse…

Dow Theory, developed by Charles H. Dow himself in the late 1800s, holds that the strength of a rally can be determined by the relative strength of stock indices. The theory holds that the Dow Transports should lead a rally in the Dow Industrials, since an improving manufacturing sector would require addition shipping volume, whether via boat, train, or air. Over 100 years later this is still a valid theory and is closely followed by many traders. Last week we saw the Dow Transports and the Dow Industrials close at new 52-weeks high, which has one option trader concluding that this rally will continue.

One of the top weightings in the Dow Transportation Index is Union Pacific, and this morning someone bought 100 August 160 calls for $2.95 with the stock at 152.83. This is $29,500 bet that UNP will be above 162.50, 6.3% higher, by August expiration.

The rally in the transports has been driven primarily by rails. The reason is two-fold. First, oil production in the Bakken is exceeding …